Fannie Mae and Freddie Mac are the two largest government-sponsored
enterprises (GSEs) and suppliers of funds to the one- to four-family
housing market in America. A GSE is a privately owned, federally chartered
corporation that operates nationally with specialized lending powers.
The Congress creates GSEs to correct perceived failures in private
credit markets. To assist GSEs in achieving their goals, Congress
provides them with explicit subsidies. Fannie Mae and Freddie Mac,
for example, do not pay state and local income tax on their earnings.
More important are the implicit subsidies that GSEs receive. Although
the federal government has disavowed any legal responsibility for
their financial obligations, markets behave as if the federal government
would almost surely make good on GSEs' obligations if the GSE could
not. This saves the GSEs money by allowing them to borrow at an interest
rate that is only slightly above the rate available to the U.S. Treasury.
Fannie and Freddie provide funds to the housing market by borrowing
money on national capital markets and using the funds to purchase
mortgages on the secondary market. Fannie and Freddie cannot finance
mortgages above the conforming limit ($214,600 in 1997 for one-
to four-family mortgages) or mortgages that do not meet certain
credit standards. Nonetheless, the scale of Fannie and Freddie's
operations are substantial; they had financed about 36 percent of
all one- to four-family housing debt outstanding as of June 1996-more
than the entire commercial banking system.